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News, Developments and Practical Advice from Antitrust LeadersWed, 06 Dec 2017 23:20:17 +0000en-UShourly1https://wordpress.org/?v=4.7.8New Antitrust Division Chief Prioritizes Regulation of Standard Setting Organizationshttp://feeds.lexblog.com/~r/AntitrustAdvocate/~3/7Ezk2yFMZMU/
https://www.antitrustadvocate.com/2017/12/06/new-antitrust-division-chief-prioritizes-regulation-of-standard-setting-organizations/#respondWed, 06 Dec 2017 15:57:39 +0000https://www.antitrustadvocate.com/?p=4687Continue Reading]]>As we discussed in our May 2017 article, the current head of the DOJ’s Antitrust Division, Makan Delrahim, brings considerable intellectual property experience to the division. Delrahim started his legal career at the Office of the U.S. Trade Representative as deputy director for intellectual property rights. He later served on the Intellectual Property Task Force while serving a stint at the DOJ in the early 2000s. Then-acting Antitrust Division Chief R. Hewitt Pate referred to Delrahim as a “patent lawyer.” Therefore, it is not surprising that, in a Nov. 10 maiden speech at the University of California’s Transactional Law and Business Conference, Delrahim chose to discuss antitrust violations in IP licensing, specifically urging federal and state antitrust enforcement agencies to prioritize review of standard setting organizations (SSOs).

Delrahim’s Remarks on Anticompetitive SSO Licensing

SSOs are private associations that, among other things, develop technical, quality and safety standards and that sometimes issue certifications of compliance for products that meet those standards. They usually offer membership to industry participants, from which they obtain funding, and are routinely managed by employees of those organizations. One example of an SSO is the National Fire Protection Association (NFPA). As the Supreme Court explained in Allied Tube & Conduit v. Indian Head, a seminal antitrust case applying the Sherman Act to SSOs, the NFPA is a “private, voluntary organization” of “individual and group members representing industry, labor, academia, insurers, organized medicine, firefighters, and government” that “publishes product standards and codes related to fire protection.” The standards set by the NFPA are “routinely adopted” by “a substantial number of state and local governments.”

In his recent speech, Delrahim examined the relationship between patent holders–which he called technology “innovators”–and SSOs–which he called “technology implementers.” He identified two potential antitrust issues arising from interaction between these two groups: the “hold-up problem” and the “hold-out problem.” According to Delrahim, the hold-up problem occurs when patent holders leverage their exclusive rights to a patented design to demand favorable royalty terms from SSO members, the idea being that, once an SSO has adopted its standard, SSO members must either agree to patent holders’ demands or risk being effectively excluded from the market. Conversely, the hold-out problem occurs when SSOs leverage their industry clout by “threatening to under-invest in the implementation of a standard [utilizing the patented design] or threatening not to take a license at all, until its royalty demands are met.”

According to Delrahim, the “hold-up and the hold-out problems are not symmetric,” and the “collective hold-out problem [represents] a more serious impediment to innovation.” This is because patent holders must “make an investment before they know whether that investment will ever pay off” while “at least some of [SSOs’] investments occur after royalty rates for new technology could have been determined.” Therefore, he urged antitrust enforcers nationwide to “carefully examine and recognize the risk that SSO members might engage in a form of buyer’s cartel, what economists call a monopsony effect” by collectively agreeing when and on what terms to adopt a standard or continue supporting an incumbent one.

While Delrahim spent a great deal of his speech unpacking his thoughtful theory of asymmetry between the hold-up and hold-out problems, the upshot of his remarks is that the new Assistant Attorney General for the Antitrust Division believes that SSOs should be more rigorously scrutinized, especially when it comes to IP licensing. As Delrahim warned (quoting the Supreme Court in American Society of Mechanical Engineers v. Hydrolevel): “SSOs ‘can be rife with opportunities for anticompetitive activity.’ When competitors come together, there is always a risk that they will engage in naked cartel-like behavior, such as fixing downstream prices or boycotting a new entrant.” Delrahim “therefore urge[d] antitrust enforcers … to take a fresh look at concerted actions within SSOs that cause competitive harm to the dynamic innovation process,” by using all the tools in their prosecutorial toolboxes. Since antitrust violations are a federal predicate crime, that includes possible wiretaps.

Antitrust Enforcement Against SSOs

The DOJ can regulate SSOs civilly and criminally under Sections 1 and 2 of the Sherman Act. Section 1 of the Sherman Act prohibits contracts, combinations and conspiracies in restraint of trade while Section 2 of the Sherman Act prohibits monopolization, attempted monopolization, and conspiracy to monopolize trade or commerce. Section 5 of the Federal Trade Commission Act is broader than the Sherman Act and gives the FTC substantial authority to prosecute civilly “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.”

In Allied Tube & Conduit, the Supreme Court ruled that SSO standard setting is not immune from the antitrust laws–even when federal, state, or local government entities ratify standards set by SSOs. By contrast, SSOs are generally entitled to immunity under the Noerr-Pennington Doctrine when their activities relate to direct petitioning of government entities, unless that petitioning is a sham to cover what is nothing more than a baseless attempt to interfere with business rivals for anticompetitive purposes. For example, SSOs would be immune to the extent they legitimately coordinate sponsorship of a legislative bill or bring a lawsuit with merit against a member who falsely advertises that its product complies with an SSO standard.

Further, courts generally apply the necessarily fact and expert extensive rule of reason to SSO industry standards, except to the extent the conduct in question amounts to naked cartel behavior–e.g., price fixing, group boycotts, and market allocation. The rule of reason requires courts to balance the procompetitive and anticompetitive effects of the standard or certification at issue to determine whether it unreasonably restrains trade in the relevant market. While standards may have procompetitive aspects, they can also retard innovation. And liability can be extensive. SSOs, participating member organizations, and member organization employees serving SSOs in a managerial capacity can all be held liable. Violations carry stiff fines and can lead to disgorgement of ill-gotten proceeds under the Lanham Act (not to mention criminal charges). In addition, private antitrust lawsuits frequently accompany or follow DOJ enforcement actions, exposing SSOs and their members to automatic treble damages, as well as attorneys’ fees and costs incurred in successfully prosecuting those claims.

Precautions to Avoid Liability

SSOs and their members can and should (with Delrahim now at the helm) take a number of steps to mitigate the risk of antitrust liability. First, they should implement regulations governing the processes by which they set new standards (or elect to retain old ones) and issue certifications of compliance with those standards. Second, those regulations should be based on objective criteria that remove discretion from the equation, to avoid the appearance that SSOs and their member organizations are picking favorites among competitors. Third, the objective criteria should be reasonably related to legitimate SSO purposes and be narrowly tailored to address those objectives. Fourth, the process of adopting standards and issuing certifications should be transparent (although Delrahim noted in his speech that “the old notion that openness alone is sufficient to guard against cartel-like behavior in SSOs may be outdated, given the evolution of SSOs beyond strictly objective technical endeavors”). Fifth, standards should be voluntary such that member organizations do not feel obligated to adopt them to avoid SSO blowback. Sixth, membership in SSOs should be open to any organization that wishes to join and meets the criteria for admission.

Further, SSOs and their members should take care to avoid sharing confidential business information. This includes research and development, pricing and pricing methods, profit margins, output levels, and geographic sales territory. The sharing of this information will certainly draw the attention of regulators and, under the Supreme Court’s liberal pleading standard, can open the door to costly, time-consuming, and disruptive discovery. These precautions are especially important where an SSO’s members collectively comprise a substantial share of the relevant market.

Most importantly, SSOs and their members should take to heart and view Delrahim’s comments as presenting an opportunity to engage in a probably long overdue review update of their antitrust policies and to re-evaluate their training protocol. Indeed, Delrahim expressly “urge[d] SSOs to be proactive in evaluating their own rules, both at the inception of the organization, and routinely thereafter. In fact,” he continued, “SSOs would be well advised to implement and maintain internal antitrust compliance programs and regularly assess whether their rules, or application of those rules, are or may become anticompetitive.” Therefore, not doing so, will have penny wise and pound foolish consequences now, more than ever. Stay tuned.

Reprinted with permission from December 1, 2017 issue of The Legal Intelligencer. Copyright 2017. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

]]>https://www.antitrustadvocate.com/2017/12/06/new-antitrust-division-chief-prioritizes-regulation-of-standard-setting-organizations/feed/0https://www.antitrustadvocate.com/2017/12/06/new-antitrust-division-chief-prioritizes-regulation-of-standard-setting-organizations/The Trump DOJ’s View on Merger Enforcement and Remedies Explainedhttp://feeds.lexblog.com/~r/AntitrustAdvocate/~3/Y3ELkxwA4_I/
https://www.antitrustadvocate.com/2017/11/20/the-trump-dojs-view-on-merger-enforcement-and-remedies-explained/#respondMon, 20 Nov 2017 17:09:05 +0000https://www.antitrustadvocate.com/?p=4685Continue Reading]]>President Trump’s head of the Department of Justice’s Antitrust Division, Makan Delrahim, recently explained that the division will cut back on behavioral commitments such as consent orders regulating conduct and will instead rely more on structural changes such as divestitures to remedy merger concerns. This could signal significant changes in how the DOJ resolves concerns with proposed mergers going forward.

In one of his first remarks on antitrust policy since his confirmation, Assistant Attorney General Delrahim delivered a speech on November 16 regarding the relationship between antitrust enforcement and the Trump administration’s focus on limiting government regulation of business. Delrahim explained on a theoretical level that effective antitrust enforcement lessens the need for market regulations and that behavioral commitments – often consent orders that regulate the post-merger conduct of parties – represent government oversight on what preferably should be a free market. He also identified several practical problems with behavioral commitments:

They are difficult to structure, especially their length, because short remedies may be mere “Band-Aids” and long remedies may become obsolete (Delrahim referenced a judgment regulating the Horseshoers Association that is still in effect).

They are hard to oversee, as they may require monitoring the granular, day-to-day operations of businesses to assess compliance.

They are challenging to enforce because the DOJ often lacks the resources to do so effectively.

Emphasizing that behavioral remedies should be viewed with skepticism for these and other reasons, Delrahim stated that the DOJ will instead focus on structural remedies to remedy merger concerns. He supported this pronouncement with reference to the DOJ’s 2004 Remedies Guidelines that stated conduct remedies generally are not favored in merger cases. (No reference was made to the DOJ’s 2011 guidelines that state conduct remedies can be an effective method of dealing with competition concerns.)

While expressing preference for structural remedies, Delrahim left open the possibility of the DOJ accepting some behavioral commitments. He explained that behavioral remedies should avoid taking pricing decisions away from markets, and should be simple and administrable by the DOJ. He further explained that such remedies must “completely cure the anticompetitive harms.” He said the DOJ would accept these remedies only when it has a “high degree of confidence that the remedy does not usurp regulatory functions for law enforcement.” Overall, convincing the DOJ to accept behavioral remedies will be a “high standard to meet,” according to Delrahim.

Delrahim’s explanation of the DOJ’s present regard for behavioral commitments may signal changes in how the DOJ resolves concerns with proposed mergers. In recent years, the DOJ accepted behavioral remedies to resolve competitive concerns in several high-profile deals, with the 2011 joint venture among Comcast and NBC Universal, the 2011 acquisition of ITA Software by Google, and the 2010 TicketMaster/Live Nation merger among the most notable. But Delrahim’s speech suggests that the Trump administration DOJ would not have accepted these remedies. How much, if at all, the DOJ changes its approach to resolving competitive concerns will be seen as it considers pending mergers in the coming months.

]]>https://www.antitrustadvocate.com/2017/11/20/the-trump-dojs-view-on-merger-enforcement-and-remedies-explained/feed/0https://www.antitrustadvocate.com/2017/11/20/the-trump-dojs-view-on-merger-enforcement-and-remedies-explained/Supreme Court to Decide First Antitrust Case in Two Yearshttp://feeds.lexblog.com/~r/AntitrustAdvocate/~3/u6rTnYaWIoM/
https://www.antitrustadvocate.com/2017/11/09/supreme-court-to-decide-first-antitrust-case-in-two-years/#respondThu, 09 Nov 2017 15:37:31 +0000https://www.antitrustadvocate.com/?p=4676Continue Reading]]>On Oct. 16, the U.S. Supreme Court granted certiorari in United States v. American Express, the court’s first antitrust case of the 2017 term and the first antitrust case they have reviewed since 2015. The American Express case presents complex questions about the legality of anti-steering provisions in agreements between credit card companies and the merchants that agree to accept their cards. It also presents the Supreme Court with an opportunity to provide real guidance for the first time on the application of the rule of reason, which is used to assess the anticompetitive effects of a “contract, combination … or conspiracy in restraint of trade” under the Sherman Act. This case will also be the first antitrust case which antitrust expert Justice Neil Gorsuch will join.

The Credit Card Business Model

The success of a credit card companies depends on their ability to attract a critical mass of merchants and cardholders. “That is, cardholders benefit from holding a card only if that card is accepted by a wide range of merchants, and merchants benefit from accepting a card only if a sufficient number of cardholders use it.” This market structure is often referred to as a “two-sided market” because credit card companies must serve two different customer groups to be successful. Because cardholders are empirically more sensitive to credit card fees than merchants, as a practical matter credit card companies charge most of their fees to, and therefore derive most of their revenue from, merchants, usually calculated as a fixed fee per transaction and/or as a variable fee calculated as a percentage of the price of the good or served purchased.

Accordingly, credit card companies face divergent and often contradictory economic interests in marketing their cards to merchants and cardholders. Merchants prefer low fees while cardholders prefer the “better services, benefits, and rewards that are ultimately funded by those fees.” Credit card companies attempt to balance these competing interests by charging merchant fees and offering cardholder benefits that are satisfactory (or at least acceptable) to both groups. This equilibrium can be tricky: decrease merchant fees too much and the company cannot offer enough services, benefits, and rewards to maintain a critical mass of cardholders; increase services, benefits, and rewards too much and the merchant fees necessary to support those services may drive away merchants.

In an effort to balance these competing economic interests and in response to competition from rival credit card companies, Amex added nondiscriminatory provisions (NDPs) to its contracts with merchants. These NDPs prohibit merchants from “offering customers any discounts or nonmonetary incentives to use credits cards less costly for merchants to accept,” “expressing preferences for any card,” and “disclosing information about the costs of different cards to [the] merchants who accept them.” The upshot of these NDPs is that they can prevent the free flow of pricing information between merchants and cardholders.

The Second Circuit Reverses the American Express Verdict

In 2010, the U.S. Department of Justice and 17 states sued Amex, claiming that the company’s NDPs violated Section 1 of the Sherman Act, which prohibits “contracts, combinations … and conspiracies in restraint of trade.” After full discovery and a seven-week bench trial, Judge Nicholas Garaufis of the U.S. District Court for the Eastern District of New York ruled that Amex’s NDPs violated the Sherman Act by restricting merchants’ ability to steer cardholders to other credit card companies and therefore allowed the company to charge “inflated prices for their services.”

On appeal, the Second Circuit reversed the district court’s verdict, fundamentally finding that it committed legal error by failing to consider both sides of the credit card industry’s two-sided market: the cardholder side and the merchant side.

First, the Second Circuit concluded that the district court incorrectly defined the relevant market by considering the merchant side of the market in isolation and “excluding the market for cardholders from its relevant market definition.” As the Second Circuit explained, this “ignores the two markets’ interdependence.” Instead, the Second Circuit explained, the district court “must consider the feedback effects inherent on the credit card platform by accounting for the reduction in cardholders’ demand for cards (or card transactions) that would accompany any degree of merchant attrition” that would result from Amex increasing its merchant fees.

Second, the Second Circuit concluded that the district court similarly erred in its application of the rule of reason because it failed to assess in its ruling after trial the procompetitive effects of Amex’s NPDs on the cardholder side of the market. The district court reasoned that the NDPs were anticompetitive because they facilitated Amex’s campaign to raise merchant fees. However, this one-sided analysis failed, according to the Second Circuit, to assess the extent to which the increase in merchant fees were (or would be) used to fund cardholder benefits. To the extent Amex chose to offset the increase in merchant fees with an increase in cardholder benefits, that increase in benefits could attract further and more affluent Amex cardholders. Therefore, Amex’s increase in merchant fees could actually benefit merchants by giving them access to more consumer spending. As the Second Circuit held: “Because the NDPs affect competition for cardholders as well as merchants, the Plaintiffs’ initial burden [at trial] was to show that the NDPs made all Amex consumers on both sides of the platform–i.e., both merchants and cardholders–worse off overall.”

The Significance of the Supreme Court’s Grant of Certiorari

The Supreme Court’s decision to grant certiorari in the American Express case is significant for two reasons. First, it gives the court the opportunity to explore the application of the Sherman Act to so-called “two-sided markets,” where businesses market their services to two or more distinct customer groups, each of which may respond to different incentives but each of which is nonetheless essential to the service being offered. Other industries that often operate under similar market structures are the software industry (which connects computer users and application developers) and the real estate listing industry (which connects home buyers and sellers).

Even the health care market (which we discussed in our November and December 2016 articles) has features reminiscent of a two-sided market. As the Seventh Circuit explained in FTC v. Advocate Health Care Network, “insurance … splits hospital competition into two stages: one in which hospitals compete to be included in insurers’ networks, and a second in which hospitals compete to attract patients. Insured patients are usually not sensitive to retail hospital prices, while insurers respond to both prices and patient preferences.”

Second, the American Express case provides an opportunity for the Supreme Court finally to offer some further needed guidance to the lower courts on the correct application of the rule of reason. Although the rule of reason has been around (in one form or another) for more than a century, the Supreme Court has never provided much insight into how courts should balance the procompetitive and anticompetitive aspects of a restraint on trade (not all of which are unlawful). Past Court decisions have instead limited their focus to identifying the circumstances under which the rule of reason (as opposed to the per se rule) should apply.

For example, in the Court’s 2008 seminal decision in Leegin Creative Leather Products v. PSKS, Justice Anthony Kennedy, writing for the court, considered whether the rule of reason should apply to “vertical” restraints. In Leegin Leather, the vertical restraint at issue was a manufacturer’s minimum resale price agreements with retailers selling the manufacturer’s product. Although the court concluded that rule of reason also applies to resale price maintenance agreements, it remanded the case for further proceedings and therefore elected not to engage itself in the rule of reason analysis on appeal. By contrast, in the American Express case, the parties and the lower courts agree that the rule of reason applies, so the Supreme Court may take the opportunity to address the application of the rule itself for the first time.

Justice Gorsuch’s First Supreme Court Antitrust Case

The American Express case will be Justice Gorsuch’s first antitrust case since he was appointed to the Supreme Court on April 7. As we discussed in our February and March articles, Justice Gorsuch is a well-known antitrust expert. In his early years in private practice at Kellogg Huber Hansen Todd Evans & Figel, Gorsuch defended Baby Bell corporations from antitrust claims brought by the Department of Justice and competitors. He also successfully represented snuff tobacco manufacturer Conwood Co. against rival U.S. Tobacco Co. in the classic predatory practices case of Conwood v. United States Tobacco case, in which the Conwood Co. was awarded what is widely considered to be one of the largest antitrust jury verdicts ever awarded to a private litigant: $350 million (subsequently trebled under the Sherman Act to $1.05 billion).

As a Judge on the U.S. Court of Appeals for the Tenth Circuit, Justice Gorsuch authored three important antitrust opinions. In Four Corners Nephrology v. Mercy Medical Center of Durango and Novell v. Microsoft, Gorsuch examined the extent to which the Sherman Act imposes an obligation on businesses to deal with their competitors. In Kay Electric Cooperative v. Newkirk, Gorsuch evaluated the application of state action immunity in the context of municipal utility companies acting as private market participants.

During his short tenure on the Supreme Court, Justice Gorsuch has been an active and vocal member of the court, including even at oral argument as the most junior justice. Of the 16 cases in which Gorsuch participated in the 2016 term, he authored one majority opinion (not including possible per curiam opinions, which do not identify the authoring justice(s)), three dissents, and one concurrence. He also joined in a number of other concurrences and dissents. The American Express may provide further insight into Gorsuch’s still evolving antitrust jurisprudence, especially if he chooses to write his own concurrence or dissent (or maybe even be selected to write the court’s majority opinion). Stay tuned.

Reprinted with permission from the November 6, 2017 issue of The Legal Intelligencer. Copyright 2017. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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]]>https://www.antitrustadvocate.com/2017/10/31/antitrust-partner-dan-foix-to-present-at-upcoming-aai-conference/feed/0https://www.antitrustadvocate.com/2017/10/31/antitrust-partner-dan-foix-to-present-at-upcoming-aai-conference/Presidential Powers and Antitrust Politics: Part Threehttp://feeds.lexblog.com/~r/AntitrustAdvocate/~3/ZmlOHxZO-lo/
https://www.antitrustadvocate.com/2017/10/13/presidential-powers-and-antitrust-politics-part-three/#respondFri, 13 Oct 2017 21:16:25 +0000https://www.antitrustadvocate.com/?p=4669Continue Reading]]>In July and August, we discussed the president’s role in setting antitrust policy at the Department of Justice, Antitrust Division. Specifically, we pointed out that presidents routinely face competing domestic and foreign policy challenges that require a delicate balance and flexible approach to antitrust enforcement. For example, President John F. Kennedy directed the DOJ to investigate the steel industry for price fixing because of concerns about labor strikes and monetary inflation. Likewise, President Harry S. Truman chose not to pursue criminal antitrust charges against the oil industry because of national security concerns, specifically the threat of a political coup in Iran and concerns that the Soviet Union would encroach American interests in the Middle East. Therefore, we concluded that the Antitrust Division has not historically (and should not be constitutionally) completely independent from the White House. Read Full Article >>

Reprinted with permission from the September 29, 2017 issue of The Legal Intelligencer. Copyright 2017. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

]]>https://www.antitrustadvocate.com/2017/10/13/presidential-powers-and-antitrust-politics-part-three/feed/0https://www.antitrustadvocate.com/2017/10/13/presidential-powers-and-antitrust-politics-part-three/Recent Investigation Closing Suggests FTC’s Process Reforms Might Be Meaningfulhttp://feeds.lexblog.com/~r/AntitrustAdvocate/~3/WdxUmax8E0c/
https://www.antitrustadvocate.com/2017/10/04/recent-investigation-closing-suggests-ftcs-process-reforms-might-be-meaningful/#respondWed, 04 Oct 2017 16:40:03 +0000https://www.antitrustadvocate.com/?p=4667Continue Reading]]>Back in April, we reviewed several new initiatives within the Federal Trade Commission (FTC) focused on eliminating “wasteful, legacy regulations and processes that have outlived their usefulness,” including “process reforms” for civil investigatory demands (CIDs) for reviewing and closing some investigations. Now, six months later, we thought it useful to consider whether these new initiatives have been meaningfully applied to investigations.

Since announcing its process reforms, the FTC has attributed the closing of only one investigation to the reforms. This previously nonpublic investigation reportedly began six years ago. In a press release on the closing, Acting Chairman Maureen K. Ohlhausen explained: “Matters that ultimately do not merit enforcement action can and should be closed promptly.”

One may deduce that the FTC closed the investigation when, after years of scrutiny, it determined there was insufficient basis to conclude a violation may have occurred. This would suggest that the FTC’s process reforms might be inconsequential in application, since the FTC’s Operating Manual already calls for closing investigations that “reveal[] no violations of the laws or regulations enforced by the Commission.” Alternatively, it is also possible that the reforms did meaningfully inform the FTC decision to close the investigation, as a parallel investigation reportedly continues in the European Union and the FTC’s reforms could explain this divergence by investigators.

With only one closing attributed to the FTC’s process reforms, it may be too early to ascertain the reforms’ impact on investigations going forward. But Ohlhausen’s references to the reforms indicate the FTC is considering them. And the FTC closing an investigation while the European Union continues to investigate suggests the reforms actually have been meaningfully applied by the FTC, and they could provide parties under investigation additional reasons for seeking to limit or end investigations.

]]>https://www.antitrustadvocate.com/2017/10/04/recent-investigation-closing-suggests-ftcs-process-reforms-might-be-meaningful/feed/0https://www.antitrustadvocate.com/2017/10/04/recent-investigation-closing-suggests-ftcs-process-reforms-might-be-meaningful/‘Tryin’ to Loosen My Load’ – FTC’s New CID Process May Reduce Your Antitrust Investigation Burden*http://feeds.lexblog.com/~r/AntitrustAdvocate/~3/yD4yY_O3O44/
https://www.antitrustadvocate.com/2017/08/07/tryin-to-loosen-my-load-ftcs-new-cid-process-may-reduce-your-antitrust-investigation-burden/#respondMon, 07 Aug 2017 15:00:40 +0000https://www.antitrustadvocate.com/?p=4659Continue Reading]]>In April we reviewed several new initiatives within the Federal Trade Commission (FTC) focused on eliminating “wasteful, legacy regulations and processes that have outlived their usefulness,” in the words of FTC Acting Chair Maureen K. Ohlhausen. As part of these initiatives, the FTC recently announced that its Bureau of Consumer Protection will be implementing “process reforms” for civil investigatory demands (CIDs), and they also could lighten the burden of responding in antitrust investigations.

According to the FTC’s press release, process reforms to be implemented by the Bureau of Consumer Protection include:

Providing plain-language descriptions of the CID process and developing business education materials to help small businesses understand how to comply.

Adding more detailed descriptions of the scope and purpose of investigations to give companies a better understanding of the information the agency seeks.

Where appropriate, limiting the relevant time periods to minimize undue burden on companies.

Where appropriate, significantly reducing the length and complexity of CID instructions for providing electronically stored data.

Where appropriate, increasing response times for CIDs (for example, often 21 days to 30 days for targets, and 14 days to 21 days for third parties) to improve the quality and timeliness of recipient compliance.

In addition to these CID process reforms, the FTC also announced that “the Bureau will adhere to its current practice of communicating with investigation targets concerning the status of investigations at least every six months after they comply with the CID.” This will, the FTC stated, “ensure companies are aware of the status of investigations.”

These announced reforms within the Bureau of Consumer Protection could meaningfully reduce the burden of responding to CIDs. These requests often demand that parties produce information for a broad period of time, including information that predates any conduct at issue by several years. The FTC’s plan to reduce the temporal scope of such CIDs could help decrease the burden of responding to them. Likewise, the FTC’s plan to simplify its instructions for providing electronically stored data, given the proliferation of electronic messaging, could further decrease the burden of responding. Most important, perhaps, the FTC’s commitment to provide more detailed descriptions of the scope and purpose of investigations should better enable the parties to negotiate and maximize these and other limitations to the scope of CIDs.

It is notable that the FTC’s recent press release attributes these reforms to the Bureau of Consumer Protection only. Back in April, the FTC stated that both the Bureau of Consumer Protection and the Bureau of Competition “are working to streamline demands for information in investigations to eliminate unnecessary costs to companies and individuals who receive them.” It is not clear from the FTC’s release whether the Bureau of Competition is also implementing the announced reforms or is developing its own reforms that will be separately released.

In any event, parties responding to antitrust-related CIDs from the Bureau of Competition may be able to rely on the announced reforms for the Bureau of Consumer Protection to lessen their burden. For example, the FTC’s Operating Manual generally instructs the FTC staff who manage CIDs to minimize the burden and inconvenience to CID recipients when practical – and if the Bureau of Consumer Protection implements reform to limit the temporal scope of CIDs, it should be practical for the Bureau of Competition to accept the same sort of limitation to minimize burden and inconvenience. Similarly, the Operating Manual suggests that all CID recipients should be provided investigation descriptions similar to those provided by the Bureau of Consumer Protection – and if that Bureau implements reform that adds more detailed descriptions of the scope and purpose of investigations, the Bureau of Competition should provide the same additional descriptions.

Whether and when the Bureau of Competition implements its own CID process reforms remains to be seen. In the meantime, however, the Bureau of Consumer Protection’s reforms could lighten the burden of responding to CIDs, and there is good reason for these reforms to be applicable to investigations undertaken by the Bureau of Competition.

*The Eagles, Take It Easy

]]>https://www.antitrustadvocate.com/2017/08/07/tryin-to-loosen-my-load-ftcs-new-cid-process-may-reduce-your-antitrust-investigation-burden/feed/0https://www.antitrustadvocate.com/2017/08/07/tryin-to-loosen-my-load-ftcs-new-cid-process-may-reduce-your-antitrust-investigation-burden/Presidential Powers and Antitrust Politics: Part Onehttp://feeds.lexblog.com/~r/AntitrustAdvocate/~3/8DimeS1VCeI/
https://www.antitrustadvocate.com/2017/07/31/presidential-powers-and-antitrust-politics-part-one/#respondMon, 31 Jul 2017 21:43:39 +0000https://www.antitrustadvocate.com/?p=4655Continue Reading]]>In June, we discussed the Trump administration’s candidate for the top post in the Department of Justice’s Antitrust Division: Makan Delrahim. During Delrahim’s confirmation hearing, Sen. Amy Klobuchar pressed him, “What would you do, if you’re in this job, if the president, or the vice president, or a White House staffer calls, and wants to discuss a pending investigation of an antitrust matter?” Delrahim responded, “The role of the assistant attorney general for antitrust is a law enforcement function,” and that “politics will have no role in the enforcement of the antitrust laws.” Delrahim’s comment appeared to placate Klobuchar’s present concerns about White House intercession or interference in pending antitrust investigations, although a confirmation vote by the full Senate is still pending. However, viewed historically, the constitutional role of the executive branch and the president in particular in dictating, directing and controlling antitrust enforcement policy is far more complex and nuanced. As is often the case, history provides the necessary context to answer thorny constitutional questions.

President Theodore Roosevelt

While the Sherman Act was passed in 1890, it did not become a staple of federal domestic policy until 1901, when Teddy Roosevelt was sworn into the Office of the Presidency after William McKinley’s assassination. Former Presidents Harrison, Grover Cleveland and McKinley had largely ignored the increasing consolidation of big industry. Meanwhile, the titans of the steel, oil and financial industries combined forces to build massive trusts—organizations designed to hold the stock of constituent organizations (like holding companies)—and conspired to fix and control prices, exclude and harm competitors with a panoply of predatory means and dominate the output of available goods and services in relevant markets.

For example, by the 1880s, John D. Rockefeller’s Standard Oil Trust reportedly controlled 90 percent of U.S. oil refining. Roosevelt had for some time been critical of the trusts (and overcapitalization in general), referring to them in a speech as “evil,” thereby not endearing himself to the titans of industry who felt it better to restrict Teddy to the (at the time) largely powerless vice-presidency. That plan worked for a short six months until Roosevelt became president after McKinley’s assassination. Once he assumed the office, Roosevelt directed his attorney general, Philander C. Knox, to review the legality of the trust-created monopolies under the Sherman Act. Knox initially advised against prosecuting the trusts because of unfavorable Supreme Court precedent at the time, but on Nov. 13, 1901, J.P. Morgan announced perhaps the boldest trust then to date: the combination of the Great Northern, Northern Pacific and Union Pacific railways (each a monopoly in its own right) to form the Northern Securities Co. Sensing a political opportunity and intending to demonstrate his strength to stop the “evil” of trusts, on Feb. 20, 1902, a mere five months into his presidency, Roosevelt announced that the Department of Justice would file suit against Northern Securities. Roosevelt took an active role in the case, selecting a favorable forum (the District of Minnesota, where a related state case was pending) and directing Knox to conduct the investigation in secret until the day the Department of Justice filed suit. Within days of the announcement, Morgan arrived at the White House and demanded to know why the president had not first approached him with his concerns. As Morgan told the president, “If we have done anything wrong, send your man to my man and they can fix it up.” Roosevelt tersely responded, “That can’t be done.” Knox added, “We don’t want to fix it up, we want to stop it.” Morgan’s gambit to fix the problem in the usual manner of the day failed when faced with the presidential big stick. Roosevelt would ultimately win the fight against Morgan. After a legal battle all the way to the Supreme Court, on March 14, 1904, Justice John Marshall Harlan announced from the bench: “No scheme or device could more certainly come within the words of the [Sherman] Act … or could more effectively and certainly suppress free competition.” Roosevelt had beaten Morgan by a 5-4 decision, and Northern Securities was dissolved under the Sherman Act.

President John F. Kennedy

Sixty years after Roosevelt’s inauguration, following further trust busting cases, always-evolving judicial decisions and increasing government investigations, the nation faced a new set of priorities. Set in the mire of the Vietnam War and facing off against the Soviet Union in the dead of the Cold War, the “military industrial complex” (a term made famous by President Dwight Eisenhower’s 1961 farewell address) was of paramount concern to national security. Early in President John F. Kennedy’s administration, a labor strike in the steel industry threatened to disrupt production and contribute to rising monetary inflation. To avoid these political nightmares, Kennedy using the full powers of the presidency pressured the largest steel company, United States Steel (ironically formed by J.P. Morgan and organized with the legal help of Roosevelt’s AG Philander Knox), and the United Steelworkers Union to reach a deal to keep wages low and avoid output disruptions. Kennedy’s strategy succeeded, and U.S. Steel and the union struck a deal to limit wage increases to 10 cents an hour, a major success for his administration.

However, less than two weeks later, the chairman and CEO of U.S. Steel, Roger Blough, personally handed the president a letter in the oval office informing him that U.S. Steel would be raising prices by 3.5 percent, which other steel companies would quickly follow. Furious, the president exclaimed to Blough “you double crossed me” and later confided with his Secretary of Labor (and later Supreme Court Justice) Arthur Goldberg, “He f–ked me. They f—ked us and we’ve got to try to f–k them.” In an April 11, 1962, press conference, Kennedy excoriated the “simultaneous and identical actions of U.S. Steel and other leading steel corporations,” accusing “a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility” of showing “utter contempt for the interests of 185 million Americans.” The decision, he said, would increase consumer prices and “add … an estimated $1 billion to the cost of [American] defenses, at a time when every dollar is needed for national security and other purposes.”

Kennedy’s private frustration and public speech was a declaration of war, and his brother, Attorney General Robert F. Kennedy, opened fire on the steel industry. Convinced the steel executives had colluded to raise prices by uniformly and nearly simultaneously increasing their prices, Bobby Kennedy convened a grand jury and directed FBI agents to investigate the steel executives, telling them, “we’re going for broke.” Agents called upon steel employees at 3 a.m. at their homes in Bethlehem and Pittsburgh, tapped their phones, and subpoenaed their bank accounts and tax records. Eventually, U.S. Steel capitulated and agreed to rescind the price increase. The other steel companies quickly fell in line. Kennedy’s aggressive executive style, like Roosevelt’s, succeeded.

Other Presidential Administrations

Roosevelt and Kennedy are remembered for the dramatic flair of their antitrust investigations. But they are hardly the only presidents to bring unique antitrust enforcement priorities and styles to the White House. Roosevelt would eventually buck his “trustbuster” moniker and regulate the trusts instead of prosecuting them. Roosevelt’s successor Taft, on the other hand, preferred an even more aggressive approach, directing his Attorney General George Wickersham to go after the trusts with a heavy hand (a point of disagreement with Roosevelt that would eventually lead to their personal falling out). Woodrow Wilson’s most enduring contribution to antitrust enforcement was legislative in nature. During his administration, Congress passed major legislation at the urging of Wilson: the Federal Trade Commission Act, which created the independent politically diverse Federal Trade Commission and banned “unfair methods of competition,” and the Clayton Act, which supplemented the Sherman Act by prohibiting specific anti-competitive conduct such as, according to the Federal Trade Commission, “mergers and interlocking directorates (that is, the same person making business decisions for competing corporations).”

Fuel has always been a political issue and an antitrust conundrum. During World War II, issues of national security and the war effort took priority over concerns about competition. In 1952, however, Truman ordered a grand jury investigation into the oil industry. Truman preferred criminal prosecution but eventually settling on civil enforcement over concerns that foreign policy (dominated by the post-war threat of the Soviet Union) was better served by a more circumspect approach. During the Eisenhower administration, the Department of Justice granted antitrust immunity to a consortium of oil companies exploiting Iranian oil for similar political reasons.

Fast forwarding to the 1970s, President Richard Nixon had a falling out with aggressive prosecutor Richard McLaren, then assistant attorney general of the Antitrust Division. In one of his infamous recorded conversations, Nixon told White House National Affairs adviser John Ehrlichman (of Watergate notoriety), “I don’t know whether [International Telephone and Telegraph Co.] is good, bad, or indifferent. But there’s not going to be any more antitrust activities as long as I am in this chair.” He later ordered his Deputy Attorney General Richard Kleindienst, “I want something clearly understood, and, if it’s not understood, McLaren’s ass is to be out within one hour … I do not want McLaren to run around prosecuting people, raising hell about conglomerates, stirring things up at this point. Now you keep him the hell out of it.”

The case was eventually settled with Nixon’s knowledge and apparent input, as revealed in other tapes.

Lessons Learned From History

The Constitution expressly grants the president the power to enforce the laws of the United States, which include the Sherman Act. Formulated in 1933, the Antitrust Division was created to civilly and criminally enforce the antitrust laws, and, as a division of the Department of Justice, reports to the attorney general and ultimately the president. Therefore, presidential politics have always played a significant role in the Antitrust Division’s enforcement efforts.

Despite Sen. Klobuchar’s recent call for independence from the White House, the Department of Justice’s Antitrust Division is still part of the executive branch, unlike the independent Federal Trade Commission, which exercises civil authority to ban “unfair methods of competition.” As the head of the executive branch, presidents have, some would argue, a Constitutional prerogative to direct, weigh and even dictate antitrust enforcement priorities (with informed guidance) for better or worse, as history shows. Next month we will examine other more recent uses of presidential powers and antitrust politics and will express some timely views. Stay tuned.

Reprinted with permission from the July 28, 2017 issue of The Legal Intelligencer. Copyright 2017. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

The court blocked the merger, while rejecting the parties’ argument that the deal should be approved because otherwise the acquired firm would collapse and the market would suffer. The merging companies did not meet the stringent requirements for raising this “failing firm” defense, the court ruled, because they had not shown the lack of other buyers that would not pose competitive concerns.

the opinion offers a lesson to competition attorneys and their clients, Foix said. Companies with a reason to believe that they may raise a failing firm defense in the future should make a legitimate and well-documented effort to seek out alternative offers, he said.
You need to confirm whether there are other buyers in the market, Foix said.
Of course, that may be easier said than done, Foix said. The bid solicitation process may take a year or longer, and by definition failing firms may not have that kind of time on their hands, he said.

]]>https://www.antitrustadvocate.com/2017/07/19/the-failing-firm-defense-and-how-not-to-lose-it-article-explains/feed/0https://www.antitrustadvocate.com/2017/07/19/the-failing-firm-defense-and-how-not-to-lose-it-article-explains/DOJ’s Possible Antitrust Chief’s Senate Confirmation Hearinghttp://feeds.lexblog.com/~r/AntitrustAdvocate/~3/TMX5jpYVuBY/
https://www.antitrustadvocate.com/2017/06/19/dojs-possible-antitrust-chiefs-senate-confirmation-hearing/#respondMon, 19 Jun 2017 20:36:35 +0000https://www.antitrustadvocate.com/?p=4636Continue Reading]]>Last month, we discussed Makan Delrahim’s background, including his experience litigating antitrust and intellectual property matters at the Department of Justice during the George W. Bush administration and his extensive lobbying work at Brownstein, Hyatt, Farber and Schreck. On May 10, senators from the Senate Judiciary Committee held a hearing and asked Delrahim about several matters that pose potential challenges should he be confirmed as assistant U.S. attorney of the Antitrust Division of the DOJ. For the most part, Delrahim provided candid answers, at one point even offering, “I’m an open book on this issue.” Three discussions were ­particularly insightful.

PLEDGED TO RECUSE HIMSELF FROM PAST MATTERS

As we noted in last month’s article, Delrahim faces a number of potential conflicts if confirmed to the Antitrust Division. From August 2005 to January 2017, Delrahim lobbied on behalf of a number of large corporate clients facing controversial merger review such as health insurer Anthem in its proposed (and now defunct) combination with rival Cigna. Delrahim also represented clients in other high-profile transactions including AMC Entertainment in its merger with Loews Cineplex Entertainment; T-Mobile in its merger with MetroPCS Communications; US Airways in its failed merger with Delta Airlines; and Comcast in its merger with NBC Universal, as well as other corporate clients such as Microsoft, Oracle, Apple, Qualcomm, Pfizer, Neiman Marcus, Merck and Johnson & Johnson.

Chairman Chuck Grassley’s first question for Delrahim was, “What recusal policy would you follow to avoid conflicts?” Delrahim responded that he would consult with ethics officials in the Department of Justice as well as the Antitrust Division. When Grassley probed further to determine how Delrahim would handle the Antitrust Division’s investigation into the Anthem/Cigna merger, Delrahim pledged to recuse himself from that matter, noting (perhaps presciently), “I understand the merger is now on appeal to the Supreme Court, and we will see what happens.” When Sen. Amy Klobuchar later returned to the topic of recusal, Delrahim affirmed his commitment to meet with ethics officials, noting in particular the potential ethical problems posed by “past clients, and clients of my former employer, my law firm.”

DOJ officials are bound by a number of overlapping ethical obligations, including criminal provisions of the U.S. Code as well as executive-wide and department-specific codes of conduct. Delrahim specifically invoked Title 18 U.S.C. Section 208 during his hearing, saying, “I have three little children. I have no intention of going to jail.” Section 208 prohibits an executive-branch employee from participating “in a judicial or other proceeding … in which, to his knowledge, he, his spouse, minor child, general partner, organization in which he is serving as officer, director, trustee, general partner or employee … has a financial interest.” But as a political appointee, Delrahim will be subject to ethics rules that may impose even more stringent limitations than Section 208. For example, executive order No. 13770, issued Jan. 28, requires executive agency appointees to pledge that they “will not for a period of two years from the date of their appointment participate in any particular matter involving specific parties that is directly and substantially related to their former employer or former clients” or “participate in any particular matter on which they lobbied within the two years before the date of their appointment or participate in the specific area in which that particular matter falls.”

PROMISED INDEPENDENCE FROM THE WHITE HOUSE

Another major topic probed by Klobuchar was whether Delrahim would maintain the Antitrust Division’s historic independence from the White House. Noting that President Donald Trump had previously commented on pending mergers, Klobuchar asked, “What would you do, if you’re in this job, if the president, or the vice president, or a White House staffer calls, and wants to discuss a pending investigation of an antitrust matter?” Delrahim responded, “Politics will have no role in the enforcement of the antitrust matters.” As Delrahim further explained, the Antitrust Division serves an independent law enforcement function and “there are procedures in the White House in how you communicate with the Justice Department, and who are the—there’s a handful of senior officials who can communicate through the White House Counsel’s office, and senior officials at the Justice Department for any pending matters.”

While Klobuchar’s concern may seem melodramatic, historical context suggests that political pressure poses an attractive alternative to resolving antitrust issues on the merits. In 1902, financial titan JPMorgan approached then-President Teddy Roosevelt about withdrawing the infamous antitrust lawsuit against Morgan-controlled Northern Securities Co., an organization that then-Attorney General Philander Knox accused of gaining monopoly power through controlling stock acquisitions over two competing railroad companies. Roosevelt immediately rebuffed Morgan’s business-as-usual offer, eventually cementing his place in history as a “trust buster.” Roosevelt later observed that Morgan “could not help regarding me as a big rival operator, who either intended to ruin all his interests or could be induced to come to an agreement to ruin none.” Trump campaigned on a platform that emphasized his business acumen and deal-making clout. Although his campaign rhetoric alone does not necessarily suggest that he will intervene in Division business, Trump raised eyebrows in January when he met with CEOs of proposed merging companies Monsanto and Bayer. A week after that meeting, Trump publicly touted the potential up-side of the deal, announcing that the combination would create thousands of jobs. Trump has also met with the CEO of AT&T, which is currently seeking approval for its proposed acquisition of TimeWarner, a deal that Trump has criticized as “consolidating too much power in the media industry.” Whether Trump will continue these White House forays into antitrust merger investigations without guidance or input from the Antitrust Division is unclear. If confirmed, Delrahim will likely have his hands full dealing with this White House.

EXPRESSED HIS BELIEF IN JUDICIAL RESTRAINT ON ANTITRUST IMMUNITY

Finally, Klobuchar asked Delrahim about his involvement in the U.S. Court of Appeals for the Second Circuit case Billing v. Credit Suisse First Boston, 426 F.3d 130 (2005), a case in which Delrahim apparently helped draft an amicus brief (signed and submitted by then-Assistant Attorney General R. Hewitt Pate) during his first stint at the Antitrust Division. The issue in Credit Suisse was whether the securities laws, which, among other things, regulate the underwriting of equity securities, impliedly immunize underwriting practices from antitrust scrutiny. The Antitrust Division’s brief argued that there was no conflict between the securities laws and the antitrust laws because both statutory schemes prohibited the conduct at issue: laddering, in which an underwriter requires a purchaser of securities to buy additional shares of the security later at escalating prices, and tying, in which an underwriters bundles less desirable securities with a popular issue of securities.

Taking a similar position as the Antitrust Division, the Second Circuit concluded there was no implied immunity because there was “no legislative history indicating that Congress intended to immunize anti-competitive [securities underwriting practices]”; application of the antitrust laws to the alleged anti-competitive conduct did not “create the potential for irreconcilable mandates”; none of the securities laws were “rendered nugatory” by the antitrust laws; and the SEC had never authorized the specific anti-competitive behavior at issue. Therefore, the Second Circuit ­rejected implied immunity and held that the Sherman Act applied to the allegedly anti-competitive underwriting practices. The Supreme Court granted certiorari and reversed, stressing that “underwriters’ efforts jointly to promote and to sell newly issued securities—is essential to the proper functioning of well-regulated capital markets.” Writing for the majority, Justice Stephen Breyer concluded that “the securities laws are clearly incompatible with the application of the antitrust laws in this context.” Even if the conduct at issue violated the securities laws, Breyer reasoned, “there is no practical way to confine antitrust suits so that they challenge only activity of the kind the [investor-plaintiffs] seek to target.” According to the court, a number of factors counsel against application of the antitrust laws: “the fine securities-related lines separating the permissible from the impermissible; the need for securities-related expertise (particularly to determine whether an SEC rule is likely permanent); the overlapping evidence from which reasonable but contradictory inferences may be draw; and the risk of inconsistent court results.”

When Klobuchar raised the Credit Suisse issue, Delrahim encouraged her questioning by commenting, “I’m an open book on this issue.” As could be predicted, Delrahim registered his disagreement with the Supreme Court in a way that reflected his fundamental preference for judicial restraint on issues of antitrust immunity. Delrahim explained that “the Second Circuit which rejected immunity] wrote a well-reasoned opinion.” “In my views on the Antitrust Modernization Commission, if there are immunities from the antitrust laws, I think it should be done by this body, not impliedly by the courts.” Klobuchar responded, “Good answer.”

Delrahim’s committee hearing appears to have been largely a success. His answers appeased the questioning senators and provided reassurances that he will run a competent, scrupulous and independent Antitrust Division. Once Delrahim is finally voted out of committee, his nomination will be sent to the Senate for a floor vote. Stay tuned.

Reprinted with permission from the June 2, 2017 issue of The Legal Intelligencer. Copyright 2017. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.